Vivendi of France Acquiring U.S. Filter

By CLAUDIA H. DEUTSCH

Published: March 23, 1999

Vivendi S.A. of France is to acquire the United States Filter Corporation for $6.2 billion in cash, or $31.50 a share. The deal, announced yesterday, would create a $12 billion behemoth that would be ''the largest company in one of the world's fastest-growing industries,'' said Rod Lache, an analyst with Deutsche Bank Securities.

The two companies are a jigsaw-puzzle fit. U.S. Filter, based in Palm Desert, Calif., is the largest global supplier of industrial water-treatment equipment and services. It is 14 times the size of its nearest competitor, Ionics Inc. Vivendi's Generale des Eaux subsidiary dominates global municipal markets.

Negotiations on the acquisition were first reported in The Wall Street Journal yesterday. The deal would create a company that derives 60 percent of its revenue from municipalities, 30 percent from industry and 10 percent from users like consumers of bottled water.

Few analysts expect antitrust problems. The merged company would still have just a small part of the global market for water treatment and services, which is now $300 billion and growing 8 percent a year.

That market is highly fragmented. Water-treatment chemical companies like Nalco and Hercules Betz Dearborn are huge sellers to the global industrial market, while Suez Lyonnaise des Eaux S.A. of France is a formidable No. 2 to Vivendi in municipal systems.

''Water utilities will ultimately be cleaning up water, too, particularly in places like China,'' said Purna R. Saggurti, an investment banker at Deutsche Bank Securities.

There are also tens of thousands of small companies filling tiny market niches. ''This is a highly segmented industry that finally has a clear leader setting the pace,'' said Christopher Bodnar of Bear, Stearns & Company, who expects the U.S. Filter acquisition to spur a flurry of smaller deals.

Against that backdrop, the role of acquiree seems a strange one for U.S. Filter. The company was founded in 1990 on the premise that customers for water treatment were tired of dealing with 15 or more vendors to buy pumps, valves and other items needed to gather, cleanse and distribute water. U.S. Filter set out to gobble up enough smaller competitors to be able to offer one-stop shopping.

It has bought hundreds of tiny companies, as well as a few big ones. Last year, for example, it paid $1.5 billion for Culligan Water Technologies, a leader in bottled water and residential water treatment.

Richard J. Heckmann, U.S. Filter's chairman, first met Jean-Marie Messier, Vivendi's chairman, three years ago, when Mr. Heckmann broached the idea of U.S. Filter's buying Aqua Alliance, Vivendi's American arm. ''They were so much bigger than us, Jean-Marie just laughed,'' Mr. Heckmann recalled.

But by January, U.S. Filter had grown to $5 billion in annual sales, and Mr. Heckmann approached Mr. Messier again. ''This time, his answer was, 'Why would I want to get out of the U.S.' '' Mr. Heckmann recalled. They continued talking, and the idea of a combination was born.

''We knew we had to start looking outside our borders for growth, and we knew that we'd need a partner to do that,'' Mr. Heckmann said.

U.S. Filter also needed help getting into the fast-growing municipal water market. Municipalities want suppliers with track records, and U.S. Filter has run very few municipal water systems. Moreover, municipal water treatment is capital intensive, and U.S. Filter ''is loaded with debt and pretty much capped out,''' said David Manlowe, an analyst with BT Alex. Brown.

The equity market was no answer. Investors, concerned that industrial customers like the semiconductor industry are cutting capital spending, have been bailing out of water-treatment stocks. And they have been particularly wary of U.S. Filter. ''There haven't been major earnings disappointments or blowups, but they've grown so rapidly that the risk factor was pretty high,'' Mr. Lache of Deutsche Bank Securities said.

U.S. Filter's stock was trading in the mid-40's in 1997, yet fell as low as $11.50 last fall. Last week, it bounced back to the 30's, but few analysts expect that it would have gone much higher. Indeed, even big owners like the Bass Brothers, who acquired about 8 percent of the company in a 1997 real estate deal that translated to about $26 a share, have tendered their shares.

U.S. Filter's stock closed at $30.375 yesterday, down 12.5 cents. Vivendi, a $35 billion conglomerate that derives most of its revenue from telecommunications and television, is not traded in the United States.

Photo: When top executives of water companies announce a merger, they raise a toast in water, naturally. Jean-Marie Messier, left, of Vivendi, celebrated in New York yesterday with Richard J. Heckmann of U.S. Filter. (Rebecca Cooney for The New York Times)